Get exclusive money‑saving offers and guides

Why did my home loan interest rate change?

15 September 2017

Banks can change their rates for a variety of reasons, and the Reserve Bank's cash rate decision is just one of them.

The Reserve Bank has remained on the sidelines since May of last year, with the cash rate remaining at 2%. In spite of this long period of inactivity, home loan rates have been anything but static. Any big rate moves by lenders grab a lot of media attention, but little time is invested in explaining why lenders might move on home loan rates. Below are a few of the reasons you might find your home loan interest rate changing.

The Reserve Bank cash rate

The RBA makes headlines every time it holds its monthly cash rate meeting, but what exactly is the cash rate and how does it impact the rates banks charge you? The cash rate is the rate the RBA charges banks for overnight loans. When deciding to move on the cash rate, the RBA takes several factors into account, such as employment, inflation, gross domestic product, consumer spending and confidence and the performance of the housing market. The Reserve Bank moves the cash rate to try to balance out growth and inflation.

Slowing inflation

One of the Reserve Bank’s primary objectives is to keep inflation low, ensuring that the prices of consumer goods don’t rise too quickly and erode consumers’ buying power. The RBA has a 2-3% target band for inflation. It gauges this by watching the Consumer Price Index (CPI). This monthly measure shows the cost of a selection, or basket, of common consumer goods and services. By seeing how much this index increases each month, the RBA can keep an eye on inflation. If it finds inflation is rising above its 2-3% target band, the bank may raise the official cash rate to slow consumer spending, thus slowing price growth.

Promoting growth

If the RBA wants to create economic growth, they might choose to cut the official cash rate. The intention behind this is to make money less expensive to borrow and outstanding loans less expensive to pay off, thus encouraging consumers to spend. The Reserve Bank also pays attention to the unemployment rate in making its decisions. A higher unemployment rate could be a sign of a lack of business confidence and investment. This could lead the bank to cut the official cash rate in order to provide a boost to business confidence and, in turn, encourage hiring.

The RBA's historic cash rate moves

Funding costs

The money banks lend you has to come from somewhere, of course. For most lenders, the source of this money is a mix of deposits and what’s known as wholesale debt. Wholesale debt is money the bank borrows at a lower rate and then lends on to borrowers. An example of wholesale debt is a residential mortgage backed security (RMBS). This is a pool of mortgages owned by the bank that it sells as a bond to investors. The bank secures funds this way to make new loans to consumers, but it also incurs debt because it has to pay investors back based on the performance of these mortgages.

A variety of factors influence the amount banks pay for wholesale debt. While the cost the RBA charges banks for overnight loans factors into a bank’s overall funding costs, it’s far from the only influence. Overseas bond markets, investor risk appetite and competition for funding sources all have a huge impact on the cost of funds for Australian banks.

Regulatory change

One of the biggest factors affecting the cost of funds for banks is regulatory change. In Australia, banks are regulated by the Australian Prudential Regulation Authority (APRA). APRA sets capital requirements for banks, which means it determines the ratio of money a bank has to hold in reserve for every dollar it loans out. After the global financial crisis, APRA followed other global banking regulators in raising capital requirements for banks.

You may have heard of Basel III in relation to banking regulation. Basel III is a set of global reform measures instituted after the GFC to make sure banks have enough capital in reserve to pay back their depositors in case of an economic downturn. This means that from 2019, banks will have to hold more money relative to the amount they lend, which makes the cost of lending money rise. This, in turn, can make your home loan rate go up as banks try to meet new capital requirements.

Not all lenders are regulated by APRA, though. APRA only oversees what are known as Authorised Deposit-taking Institutions (ADIs). This includes banks, mutual banks, credit unions and building societies. While this captures many of the lenders in the market, there are a number of non-bank lenders that don’t fall under this umbrella. Because they don’t take deposits, that means these lenders assume all the risk for their home loans. As such, they don’t have to meet capital requirements. This often means these lenders can offer a sharper rate than their ADI competitors. This doesn’t always mean, though, that non-bank lenders are totally immune to regulatory change. While they may not be directly impacted by higher capital requirements, many non-bank lenders source at least some of their funding from banks. This creates the possibility that regulatory changes impacting banks can have a flow-on effect for non-banks.

Shareholder pressures

In weighing up the decision to move on rates, banks often try to balance the desires of their customers with the desires of their shareholders. While bank profitability tends to make headlines, the number banks really pay attention to is their Return on Equity (ROE). A bank’s ROE is the amount of net income a bank generates as a percentage of its shareholders’ investment. Cutting rates on home loans will often reduce a bank’s ROE, while raising rates will increase it. In answering to its shareholders, a bank wants to deliver the highest ROE possible without also alienating borrowers. It’s this balancing act that can see a bank move on rates outside of the RBA.

Home loan appetite

Banks might not come out and say it, but their appetite for growth can play a huge role in the competitiveness of their rate offering. In setting their home loan strategy, banks make a decision about how fast they want to grow their total portfolio of home loans.

You may have heard banks in their financial results referring to growing at, above or below system growth. System growth is the average growth of the home loan market across all lenders. If a bank decides it wants to grow above system, it means it has a higher appetite for home loans. To achieve this, it might cut its interest rates independent of the RBA in order to create more home loan demand. If it decides it wants to slow down its growth, it might not be as concerned with bringing a competitive offering to the market. It might even choose to raise rates in order to blunt home loan demand.

What to do about it

Out-of-cycle rate moves can cut both ways. Banks can lower rates outside of the RBA in order to generate more demand for their products, but they can also raise them if their funding costs go up or if they want to generate a higher ROE. But this doesn’t mean you have to be at the mercy of out-of-cycle rate hikes.

When your bank moves on rates, it’s a great time to check into getting a better deal through another lender. As we mentioned above, non-bank lenders are often able to offer sharper rates because they don’t face the same capital requirements and regulatory changes. Likewise, a move by one bank might not signal a move by all other banks.

Banks can face different funding and profitability pressures, and an out-of-cycle rate hike by one lender can present an opportunity for other banks - and for you - for more competitive deals.

Ask an Expert

Do not enter personal information (eg. surname, phone number, bank
details) as your question will be made public

finder.com.au is a financial comparison and information service, not a bank or
product provider

We cannot provide you with personal advice or recommendations

Your answer might already be waiting – check previous questions
below to see if yours has already been asked

Your Question

Subscribe to the Finder newsletter for the latest money tips and tricks

Notify me via email when there is a reply

Finder only provides general advice and factual information, so consider your own circumstances, read the PDS or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms and Conditions and Privacy Policy.

Disclaimer - Hive Empire Pty Ltd (trading as finder.com.au, ABN: 18 118 785 121) provides factual information, general advice and services on financial products as a Corporate Authorised Representative (432664) of Advice Evolution Pty Ltd AFSL 342880. Please refer to our FSG - Financial Products. We also provide general advice on credit products under our own Credit Licence ACL 385509. Please refer to our Credit Guide for more information. We can also provide you with general advice and factual information on about a range of other products, services and providers. We are also a Corporate Authorised Representative of Countrywide Tolstrup Financial Services Group Pty Ltd. ABN 51 586 953 292 AFSL 244436 for the provision of general insurance products. Please refer to our FSG - General Insurance. We hope that the information and general advice we can provide will help you make a more informed decision. We are not owned by any Bank or Insurer and we are not a product issuer or a credit provider. Although we cover a wide range of products, providers and services we don't cover every product, provider or service available in the market so there may be other options available to you. We also don't recommend specific products, services or providers. If you decide to apply for a product or service through our website you will be dealing directly with the provider of that product or service and not with us. We endeavour to ensure that the information on this site is current and accurate but you should confirm any information with the product or service provider and read the information they can provide. If you are unsure you should get independent advice before you apply for any product or commit to any plan. (c) 2018.

Feedback

How likely would you be to recommend finder to a friend or colleague?

0

1

2

3

4

5

6

7

8

9

10

Very UnlikelyExtremely Likely

Required

Required

Required

Optional, only if you want us to follow up with you.

By submitting your email, you agree to the finder.com.au Privacy Policy

Thank you for your feedback.

Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.

Important information about this website

finder.com.au is one of Australia's leading comparison websites. We compare from a wide set of major banks, insurers and product issuers.

finder.com.au has access to track details from the product issuers listed on our sites. Although we provide information on the products offered by a wide range of issuers, we don't cover every available product. You should consider whether the products featured on our site are appropriate for your needs and seek independent advice if you have any questions.

Products marked as 'Promoted' or "Advertisement" are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options and find the best option for you.

The identification of a group of products, as 'Top' or 'Best' is a reflection of user preferences based on current website data. On a regular basis, analytics drive the creation of a list of popular products. Where these products are grouped, they appear in no particular order.

Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment.

We try to take an open and transparent approach and provide a broad based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.

Some product issuers may provide products or offer services through multiple brands, associated companies or different labelling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.

Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.

Please read our website terms of use for more information about our services and our approach to privacy.